Repositrak, Inc. quarterly report, Q2 FY2019

Business context and reporting period

This is Park City Group, Inc.’s unaudited Form 10-Q for the quarter ended December 31, 2018, its fiscal second quarter, and the six months ended on that date. Park City Group is the parent of ReposiTrak, Inc.; the filing reports consolidated results, not ReposiTrak as a standalone issuer. Its SaaS platform serves retailers, wholesalers, and suppliers through marketplace, compliance/food safety, and supply-chain products.

Financial performance and position

For the quarter, revenue fell 3% year over year, while operating income rose about 23%. For the six months, revenue increased 10%, operating income about 51%, and net income about 58%. Six-month operating cash flow increased 34%. Cash rose to $16.68 million from $14.89 million at June 30, 2018; working capital was $15.48 million, down from $15.74 million. Current assets were $25.03 million and current liabilities $9.54 million.

At December 31, debt comprised $4.66 million drawn on a variable-rate line of credit and approximately $0.295 million of fixed-rate notes, totaling $4.95 million. The filing reports a current ratio of approximately 2.6, based on reported current assets and liabilities. Total liabilities were $9.80 million. Preferred dividends accrued were $146,611 for the quarter and $293,222 for six months.

Material changes versus prior comparable periods

• Quarterly revenue declined mainly on lower Marketplace transaction revenue and software-license sales, partly offset by higher compliance and supply-chain subscriptions. Six-month growth reflected increases across revenue streams.
• Quarterly cost of services fell 11% to $1.27 million; over six months it rose 5% to $3.00 million as the company invested in Marketplace and expanded compliance features.
• Sales and marketing fell 30% for the quarter and 5% for six months, reflecting lower headcount, salaries, and variable compensation under the Success Team strategy. General and administrative expense rose 16% for the quarter and 9% for six months, partly due to administrative compensation, accounting, and compliance costs.
• Cash from operations improved year over year. Investing outflows were just $3,547 for the six months, versus $288,884 in 2017. Financing cash outflow was $37,192, including $1.43 million of additional line-of-credit borrowings and $1.49 million of debt and lease repayments.

Outlook, risks, contingencies, and unusual items

• Management expects revenue to increase in subsequent periods, particularly through new customers and cross-selling, but provides no quantified guidance. It expects service costs to rise as Marketplace investment continues; sales and marketing to remain relatively flat in absolute terms; and G&A to increase in absolute terms, while potentially declining as a share of revenue.
• Management believes cash, short-term investments, and operating cash generation can fund operating and investment needs for at least twelve months. Future capital needs depend on growth, sales and marketing, research and development, and customer acceptance.
• On January 9, 2019, the bank amended the revolving note: maturity was extended to December 31, 2019, borrowing capacity increased to $6.0 million, and the rate became 1.75% plus the greater of zero or one-month LIBOR. The note became unsecured, subject to maintaining liquid assets equal to the outstanding balance and a maximum Senior Funded Debt-to-EBITDA ratio of 2:1.
• The company also entered a bank master lease allowing up to $1.0 million of financing for IT equipment, services, and the new office build-out. A January 4 office lease provides for $10,200 monthly rent beginning March 1, 2019, with a three-year initial term and two three-year renewal options.
• Series B and B-1 preferred shares carry 7% annual dividends if paid in cash or 9% if paid in additional shares. The company says alternatives to redeeming the remaining B-1 preferred were materially more expensive or could reduce cash. The filing reports no pending or threatened material legal proceeding and no additional risk factors beyond its 2018 annual report.
• ASC 606 was adopted July 1, 2018 using the modified retrospective method with no opening balance adjustment and no material change to revenue recognition. Lease accounting was adopted January 1, 2019; management said the retrospective effect was not material but expects future lease assets and liabilities may increase and could be material.
• Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported. No off-balance-sheet arrangements were identified as reasonably likely to materially affect the company.

Important facts for investors to verify

• Whether the recent six-month revenue and earnings growth continues, given the quarterly revenue decline and management’s unquantified growth outlook.
• Marketplace customer additions, transaction volumes, and investment costs, including the expected effect on service costs and margins.
• Receivables and contract assets: total unbilled contract assets were $5.90 million, including $3.18 million long term; the doubtful-account allowance rose to $346,204 from $153,220 at June 30.
• Availability and terms of borrowing under the amended facility, compliance with its liquidity and leverage covenants, and the effect of predominantly variable-rate debt.
• Preferred dividend obligations, potential payment in additional shares, and dilution: 814,156 restricted stock units and 1,108,805 warrants were outstanding at December 31.